NYU’s Aswath Damodaran: Markets will rally until risks show up in earnings and economy

 Concerns about stock market valuations reaching unsustainable levels have intensified as major indices hit new highs. Aswath Damodaran, professor of finance at the NYU School of Business, suggested that markets may be more trustworthy than experts when it comes to predicting future performance.

“For the last 10 years, we’ve had this conversation over and over again,” Damodaran said in an interview with CNBC. “Markets (SP500), (DJI), (COMP:IND) reach a new high. We say, ‘are markets crazy?’ And experts like me come on, and we say, ‘markets are too rich.’”

Damodaran’s perspective challenges the conventional wisdom that has dominated market analysis in recent years. He noted that over the past three to four years, he has come to believe that “markets maybe are more trustworthy on this than experts are, that their markets seem to figure things out.” This represents a significant shift from his previous stance on market valuations.

According to Damodaran, the market has experienced two distinct phases this year. “Through April 8, tech (XLK) especially was beaten up. The Mag 7 (MAGS) collectively lost, I think, $2T in market cap just in that first three months,” he said, highlighting the substantial volatility that has characterized recent market movements.

When asked about the Federal Reserve’s impact on markets, Damodaran expressed skepticism about the significance of rate cuts. “They don’t even affect the one thing they’re supposed to affect, which is interest rates,” he said. “They might affect the Fed funds rate, but treasury rates (US10Y), (US2Y), (US30Y) themselves have a life of their own.”

He predicted that even with Fed rate cuts, treasury bond rates would likely remain above 4% as long as inflation stays around 2.5-2.7%.

Damodaran also attributed recent market movements to a continuously shifting expectations game that “keeps getting reset for this market, and sometimes just delivering what is expected becomes an unexpected plus,” he said.

This pattern explains why markets often react positively to news that merely meets rather than exceeds expectations, creating what Damodaran describes as “a very strange twist on the expectations game.”

https://www.msn.com/en-us/money/markets/nyu-s-aswath-damodaran-markets-will-rally-until-risks-show-up-in-earnings-and-economy/ar-AA1L33MR